A creeping national emergency Part 2

In my column last week, I spoke about the urgent need for a manufacturing resurgence.

For those who missed it, the gist of that article is that the Philippines has become so severely import dependent that it is no longer sustainable. Our enormous and ever growing imports must be balanced with   more exports or substituted with locally manufactured products. Both solutions require a manufacturing resurgence. If this is not done, then government must find other ways to generate foreign exchange. Otherwise, the country will have no choice but to sink deeper into debt or consume its cash reserves.

Let me substantiate my assertions with facts and figures.

Think of the Philippines as a corporation that’s engaged in international trade. Let’s call her PH INC, for brevity. PH INC managed to generate $78.8 billion in exports last year. But since it has a weak manufacturing sector, it imported practically all its needs, including oil, raw materials, machines and even the majority of her people’s consumables, including food.

With most necessities imported, PH INC amassed an import bill of $137.12 billion. With this, PH INC ended with a massive trade deficit of  $58.32 billion.

Luckily, PH INC sells services too. It generated $32.5 billion in IT-BPO services but also spent $16.9 billion on services contracted. Although export of services registered a surplus, it was still not enough to cover the overall deficit. PH INC was left with a merchandise and services trade deficit of $42.72 billion.

But PH INC has debts to pay, interest payments to meet and dividends to repatriate abroad. How does it meet these obligations?

It had no choice but to utilize its windfall income derived from OFW remittances and foreign investments generated over the year. But it was still not enough. So it had to consume its cash reserves and acquire more debt.

True enough, PH INC’s debts ballooned to $249 billion last December, representing 60.9 percent of GDP (already above our 60 percent threshold). Meanwhile, its cash reserves decreased to just $99.7 billion from its peak of $109 billion.

PH INC’s unbridled imports is the reason why it is in perpetual shortage of funds for infrastructure and other social development programs.

One will argue that the spike in imports is due to capital goods, fuel and raw materials needed by the growing economy. That is true. But look closer into the data and you will find that 15.3 percent of importations are consumer goods. These include food, garments, construction materials, motor vehicles and luxury goods. This is what PH INC must mitigate.

On exports, not only are they small, they are also one-dimensional. PH INC’s merchandise exports amounted to only $78.8 billion (compared Vietnam’s $372 billion and Indonesia’s $292 billion). You will also find that electronic products comprised the lion’s share at 57.1 percent. The balance consist of machines, wirings, chemicals and others.

Unfortunately, PH INC lost its competitiveness is garments and textiles; shrimp, prawns, seaweeds, carrageenan and other seafood; abaca and ramie fibers; mangoes; tobacco; creative industries; rubber; footwear; iron and steel. All these we’ve began to import.

Again, one may argue that PH INC’s manufacturing sector has been growing. Yes it has – no argument. In fact, the sector grew by 11.1 percent in terms of value of production and 7.2 percent in terms of volume of production last year. But growth is not the issue. It is the scale, or lack of it, that is the crux of the matter.

So moving forward, there is no other way but to encourage more investments in the manufacturing sector. And here lies the conundrum.

Due to a poor regulatory, justice and governance regime, the Philippines has ceased to become a hospitable country for manufacturing.

Although we have heard it over and over again, let me enumerate the main impediments to manufacturing one more time so it really sinks in.

On infrastructure: We are plagued with expensive power cost, expensive logistics costs, lacking infrastructure, fragmented supply chains and slow broadband connection.

On regulations and governance: The Philippines has the third longest Foreign Investment Negative List (FINL) among emerging economies. Corruption is rampant among regulatory agencies. Lack of transparency in procurement tenders. Cumbersome business registration (it takes 33 days to start a business). Frustrating and burdensome customs and immigration procedures. Difficulty in claiming VAT refunds for exporters.

On the justice system: Complex, slow and inefficient resolutions of commercial disputes. Corrupt judges. Confusing laws (we have a mixed legal system of civil, common, Islamic and customary laws). An inexperienced judiciary, especially in the fields of technology, science and intellectual property. A separate action must be filed for foreign judgments to be recognized or enforced under Philippine laws. Weak enforcement of intellectual property rights, patents and trademarks. Inconsistent implementation of the 2010 Bankruptcy & Insolvency Law.

But this is not to say that we have not made progress. Through the years, many laws have been passed and several policies implemented to make PH INC more competitive. Let me recount them.

On infrastructure: We are catching up, what with infrastructure spending at 5.4 percent of GDP (average) from 2016 to 2022. Broadband speed has improved, as have digital payments.

On regulations and governance: PEZA remains known for its regulatory transparency and zero red tape. Passage of the amendments to the Public Service Act, Retail Trade Liberalization Act and Foreign Investment Act. Reduction of corporate income tax from 30 percent to 25 percent (CREATE Law). Passage of the Ease in Doing Business Act. The establishment of the Anti-Red Tape Authority and the Philippine Competition Commission. Pending integration into the Regional Comprehensive Economic Partnership (RCEP). A stronger Intellectual Property Code implemented. A stronger Anti-Money Laundering Act implemented. Simplified foreign exchange regulations implemented.

Despite these advances, foreign investment intake is still lagging relative to ASEAN-6. Clearly, current efforts are not enough. The breadth of reforms must be broadened and its pace accelerated. This is what the Marcos administration must do to re-ignite manufacturing and put the country’s finances in a position of strength.

*      *      *

Email: [email protected]. Follow him on Twitter @aj_masigan